"Today, we approve an important order modifying the cost allocation for
transmission projects in the PJM Interconnection. This action is significant, and
should encourage greater transmission investment in the region.

As the U.S. Supreme Court has held, "allocation of costs is not a matter for the slide
rule. It involves judgment on a myriad of facts. It has no claim to an exact
science." Today we exercise our judgment on a myriad of facts to allocate
transmission costs in a manner that encourages increased transmission investment,
avoids significant cost shifts among PJM transmission owners, and is just and
reasonable.

As I noted last month when we acted to establish transmission cost allocation rules
for the Midwest ISO, the Commission has taken varying approaches towards
transmission cost allocation in different regions. That reflects differences among the
regional grids. It also reflects the nature of the just and reasonable standard and
the reality that cost allocation is an inexact science.

In other regions where we have addressed transmission cost allocation, there was
regional consensus. Given the inexact science of cost allocation and the flexibility of
the just and reasonable standard, we were able to grant regional preference. Here,
there was no regional consensus so it was impossible to provide regional preference.

We take a different approach in PJM than in other regions. Under the order, cost
allocation would vary depending on the nature of facility planning and the size of the
facility. In PJM, we approve continued use of zonal or "license plate" rates to
allocate the costs of existing and new owner-initiated transmission facilities. We do
so based on our view that the costs of these facilities were and will be incurred to
serve customers in a particular zone and should be borne by those customers.

We also approve with some modifications PJM's current "beneficiary pays" approach
for allocating the costs of new, PJM-planned transmission projects below 500 kV.
However, we find that the PJM proposal lacks adequate details regarding its method
of determining beneficiaries and we require submission of more detail.

The costs of new, PJM-planned facilities that operate at or above 500 kV would be
shared on a region wide basis and recovered through a postage stamp rate. We
believe a postage stamp rate is appropriate for these costs because facilities of this
size represent backbone transmission projects that strengthen the entire regional
grid, improving reliability and supporting regional markets.

Our approach is different from the recommendations in the Initial Decision last year.
We reverse the judge on cost allocation for existing facilities, finding there is
insufficient evidence in the record to conclude that the existing license plate rate
design is unjust and unreasonable. In addition, the approach proposed by the judge
would result in large cost shifts and sharply increase transmission rates for some PJM
utilities. That is a factor that we gave considerably more weight to than the judge
did in the Initial Decision. For example, one approach found to be just and
reasonable in the Initial Decision would have resulted in increased rates of more than
70 percent for one transmission customer in PJM. Costs shifts of this magnitude
support our rejection of the Initial Decision's move away from license plate rates for
existing facilities in PJM.

One of the judge's goals in reallocating costs of existing transmission facilities was
sending the right price signals for future investment. I agree we need to encourage
greater transmission investment in PJM. But, that can best be accomplished through
clear rules to allocate future costs for new transmission investment.

I believe the approach we take today provides for just and reasonable allocation of
transmission costs in the PJM Interconnection."